Chile
Battling to define a future
As recently as October 2019, Chilean President Sebastián Piñera called his country an “oasis” in an economically and politically volatile region. Piñera was firmly disabused of any notions of Chilean exceptionalism soon after, when simmering discontent erupted into massive street protests causing widespread destruction and looting of city centers all over the country. This pushed Piñera to call a referendum that finally took place in October 2020, where an overwhelming majority of Chileans voted to replace the country’s constitution dating back to the Pinochet years with a new one.
At the start of 2020, Chile’s economic and political environment stood on shaky ground due to social unrest and these challenges have only compounded since COVID-19 swept the world. Chile won international praise for its swift lockdown and the highest level of testing in the region. However, Piñera’s government ran into trouble as deaths later spiked, indicating that the lockdown had been ineffective for informal workers.
Notwithstanding the treacherous year, Chile’s economy is forecast to perform relatively well, with the IMF projecting a 7.5% contraction in 2020 and growth of 5% in 2021, which would be one of Latin America’s more vigorous economic recoveries.
This is not surprising, as Chile is among the most open economies in the region and is sensitive to copper prices, which have risen steadily throughout 2020. Chile’s resilience is also due to a decades-long, cross-party commitment to prudent macroeconomic policies. This includes maintaining a balanced budget and saving the excess income from exports of copper, rather than using it to finance lavish public spending that has caused other commodity-dependent economies, like Argentina and Ecuador, to fall into costly debt traps. As a result, Chile has built a reputation among creditors and international financial institutions as a model emerging market economy, which has allowed it to spend liberally during the current crisis. In a sign of Chile’s privileged status among lenders, the IMF recently extended to Chile access to its Flexible Credit Line, which, unlike the organization’s other loan programs, is not conditioned on fiscal belt-tightening.
With access to cheap credit, Piñera’s government has rolled out a series of economic recovery measures to counteract the coronavirus-induced recession. They include a US$28 billion aid package, one of the largest among emerging market economies by share of GDP.
As a result of the country’s economic resilience, Edmundo Puentes, president of Chile’s chemical industry association, Asiquim, sees reason for optimism for the chemicals segment in Chile. In 2019, the chemical industry outperformed GDP growth by 2.5%, according to Asiquim figures. Despite the situation with methanol production, which has been very dependent on natural gas imports from Argentina, the chemical industry has been performing at healthy levels during 2020, according to Puentes. “At Asiquim we conducted a survey in June 2020 and overall, the chemical industry has continued to operate at pretty much normal rates,” he explains.
That is not to say substantial risks do not lie ahead. “I think we will see demand contract as a result of the financial crisis caused by Covid-19. Also, in Chile we have a delicate social situation since last year, so the job losses of the pandemic may increase social unrest,” he said.
The Next Choice
The upcoming presidential election in November 2021 could have profound implications for the business environment in Chile moving forward. Since protests began in 2019, the currency went into free-fall, depreciating by more than 13% before the central bank intervened. More recently, some investors have asserted that the pandemic and protests seem to be producing even greater polarization and political fragmentation, potentially opening the door to further discontent and increased tensions between executive and legislative branches in the years to come. As a result, the peso remains weaker than it should be given recent gains in copper, which is Chile’s biggest export and the country’s balance of trade.
Supporters of President Piñera’s National Renewal government argue that years under his predecessor Michele Bachelet’s Socialist party stymied industrial activity and view themselves as upholding the country’s pro-business policies and measured approach to spending. In their view, a leftist government will result in investors holding back in the absence of certainty about future investment conditions. It is also possible that the election outcome could unsettle financial markets if the winning candidates’ policies entail excessive public spending. In contrast, those on the left argue that protestors sent a resounding message that societal inequities must be addressed in order for the broader economy to prosper. Either way, unresponsive government and unkept promises of meritocracy and equal opportunity remain among Chile’s biggest challenges.
As 2020 comes to a close, Chilean voters profoundly distrust all political parties and 90% believe the country is heading in the wrong direction according to America’s Quarterly. There are no clear candidates for the presidential election next year and we do not know if the system will produce fragmentation that poses risks to business.
Regardless of the political climate and the result of the upcoming presidential election in 2021, it is critical that government continues to provide clarity on the policy and regulatory front in order to quell investor uncertainty so that Chile can remain the most advanced economy in Latin America for decades to come.
Image courtesy of Agustin Ljosmyndun